Question

g The Morrit Corporation has $960,000 of debt outstanding, and it pays an interest rate of 8% annually. Morrit's annual sales are $6 million, its average tax rate is 25%, and its net profit margin on sales is 5%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan, and bankruptcy will result. What is Morrit's TIE ratio

Answer 1

Answer:

6.21%

Explanation:

The computation of the times interest earned ratio is given below:

As we know that

Times interest earned ratio = EBIT ÷ Interest

Now for determining this, following calculations must be done:

The interest is

= $960,000 × 8%

= $76,800

Net profit

= Annual sales × net profit margin

= $6,000,000 × 0.05

= $300,000

Now the pre tax income is

= net income ÷ ( 1 - tax rate)

= $300,000 ÷ (1 - 0.25)

= $400,000

Now the EBIT is

= Pre tax income + interest expense

= $400,000 + $76,800

= $476,800

So, the TIE ratio is

= $476,800 ÷ $76,800

= 6.21%